INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00770R000100670001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 43
• Document Creation Date: December 22, 2016
• Document Release Date: July 8, 2011
• Sequence Number: 1
• Publication Date: November 21, 1986
• Content Type: REPORT

Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Directorate of
Intelligence
?
3/ dAgyrv
6--
International
Economic & Energy
Weekly
21 November 1986
VIA V
25X1
>uct
re
DI IEEW 86-047
21 November 1986
C"'" 675
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
International
Economic & Energy Weekly
21 November 1986
iii Synopsis
1 Perspective?Dim Future for International Commodity Agreements
3 Japan: Is Tokyo Serious About Boosting Domestic Demand?
11 Nigeria: Launching Economic Reforms
15
El Salvador: Economic Impact of the Earthquake
19 Increasing Consolidation in the International Telecommunications Industry
23
Briefs
International Finance
International Trade
Global and Regional Developments
National Developments
25X1
25X1
25X1
25X1
25X1
25X1
25X6
25X1
25X1
9Y1
25X1
25X1
25X1
Indicators
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence
Secret
DI IEEW 86-047
21 November 1986
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
International
Economic & Energy Weekly
Synopsis
Secret
1 Perspective?Dim Future for International Commodity Agreements
In recent negotiations of major international commodity agreements?cocoa,
coffee, and rubber?consuming countries have insisted on greater adherence to
market price trends?keeping prices lower in today's glutted markets?and a
number of producing nations are accepting the demands.
3 Japan: Is Tokyo Serious About Boosting Domestic Demand?
Prime Minister Nakasone has generated little domestic support for reorienting
economic policy despite his ringing endorsement six months ago of the Maekawa
Commission's proposals for reducing the economy's dependence on exports.
11
Nigeria: Launching Economic Reforms
After five years of resisting significant economic adjustment in the face of
plunging oil revenues, Nigeria recently has embarked on an economic reform
program to pave the way for a reconciliation with its official commercial creditors.
Nevertheless, the anticipated financial relief will not compensate fully for the
halving of oil export earnings this year, and President Babangida's government
will probably face growing political pressure to extract more concessions from
creditors, or even to unilaterally limit debt payments and abandon the reform
effort.
111
Secret
DI IEEW 86-047
21 November 1986
I Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
25X1
25X1
25X1
25X1
25X1
25X6
25X1
25X1
I I I
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
15 El Salvador: Economic Impact of the Earthquake
The earthquake that struck San Salvador last month?leaving an estimated 1,000
dead and more than 10,000 injured?will further burden a government beset by
severe economic problems and a destructive seven-year insurgency. In large
measure, El Salvador's ability to recover from the earthquake?while maintaining
its war effort?will be dependent on the government's success in generating new
sources of development assistance and on continued economic and military aid
from the United States.
19 Increasing Consolidation in the International Telecommunications Industry
The global telecommunications industry is undergoing a period of rapid change as
firms struggling to reduce R&D costs and increase global sales are turning to
international joint ventures, mergers, and other cooperative agreements.
Secret iv
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
1
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
International
Economic & Energy Weekly
21 November 1986
Perspective Dim Future for International Commodity Agreements
In recent negotiations of major international commodity agreements?cocoa,
coffee, and rubber?consuming countries have insisted on greater adherence to
market price trends?keeping prices lower in today's glutted markets?and a
number of producing nations are accepting the demands. This is in sharp contrast
to past negotiations, where LDC producers demanded high support prices and
frequently found allies among many developed consumer countries who viewed the
agreements as a form of aid. We believe that this trend toward agreements that re-
spect market trends will continue in the foreseeable future.
Four commodity agreements are technically in effect under the UNCTAD
Integrated Program for Commodities. In the past year, however, the International
Tin Agreement collapsed, negotiations for renewal of the International Natural
Rubber Agreement stalled, and efforts to stabilize surging prices under the
International Coffee Agreement failed. Only the International Cocoa Agreement
was successfully renewed this past summer to run through 1989. Most observers
feel its new market-oriented price adjustment mechanism will be a model for other
agreements.
The shift in the negotiating environment toward consuming country insistence that
market trends drive commodity agreements reflects the psychological and mone-
tary toll of the tin agreement collapse. In addition the inability of commodity
agreements to stabilize prices has pushed consumers to reconsider the economic
mechanisms of the agreements. Moreover, the general decline of commodity prices
from their 1980 peak in the face of oversupply has only been worsened by attempts
to prop up prices for producers' benefit. As a result, most consuming nations will
not support any new agreements with price distorting provisions but may continue
to support the existing commodity agreements if they are made more market
responsive.
The failure of international commodity agreements will take its toll on some
countries while aiding others. High-cost producers, such as Bolivia for tin, will face
elimination from the market because they are unable to compete at lower
unsupported prices. In contrast, emerging, efficient producers such as Brazil will
reap benefits as markets weed out less efficient producers. Producers of cocoa and
rubber, such as Ghana and Malaysia, initially will be adversely affected by the re-
lease of the bufferstocks placing downward pressure on prices. Lower prices,
however, may slow inroads being made by substitutes into commodity markets.
Meanwhile, consumers will benefit from the lower prices.
1
Secret
DI IEEW 86-047
21 November 1986
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
I I
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Japan: Is Tokyo
Serious About Boosting
Domestic Demand?
Prime Minister Nakasone has generated little domes-
tic support for reorienting economic policy despite his
ringing endorsement six months ago of the Maekawa
Commission's proposals for reducing the economy's
dependence on exports. The momentum for turning
growth inward, never strong, slowed considerably over
the summer as Nakasone focused on domestic politics
and Tokyo's concern over imminent protectionist
measures waned. Because the Japanese do not antici-
pate across-the-board trade restrictions or a severe
and prolonged recession?despite the stronger yen?
Tokyo is unlikely to make a concerted effort to
stimulate domestic demand anytime soon. Moreover,
many Japanese strongly believe that economic growth
cannot be maintained by a reliance on domestic
demand. Japanese leaders who hold this view want to
implement those Maekawa recommendations that en-
hance international competitiveness while channeling
Japan's massive trade surpluses into programs, such
as forei n aid, that can reap public relations benefits.
The Maekawa Recommendations: A Rocky Start . . .
Last spring Nakasone hailed the report of the
Maekawa Commission?his blue-ribbon panel on
trade policy?as the first of many Japanese steps to
reduce the economy's dependence on exports. Many of
the panel's recommendations only replayed previous
trade proposals, but the report contained one novel
element?a preamble suggesting Japan set as a goal
the reduction of its current account surplus to an
"internationally harmonious" level. Although stop-
ping short of recommending that Tokyo end its six-
year campaign of fiscal austerity, the commission
proposed reforms to increase domestic spending on
goods and services, reducing the need for Japanese
business to seek foreign markets. The Maekawa re-
port was successful?from Tokyo's perspective?in
Muting US and EC criticism of Japan's trade prac-
tices before and during the Tokyo economic summit in
May.
3
In the ensuing six months, however, we have seen
little evidence that the ruling party, key ministries, or
leading businessmen have embraced the basic mes-
sage?that Japan must encourage a shift away from
exports to the domestic market. As a case in point,
Tokyo has still not adopted as official policy a reduc-
tion of the current account surplus to "preserve
international harmony." Recent US Embassy report-
ing suggests that a special advisory committee chaired
by former Bank of Japan Governor Maekawa may
recommend a surplus reduction target by yearend, but
we doubt that Tokyo will abandon its longstanding
opposition to numerical targets.
. . . But Selective Implementation
Tokyo is moving ahead on several of the Maekawa
proposals for reasons having little to do with sparking
domestic growth. These steps will probably do more to
enhance Japan's international competitiveness than to
reduce its trade surplus. Government bureaucrats and
politicians, for example, have used the report's recom-
mendations to argue for implementing items long on
their agendas:
? The Japanese plan to begin a wide-ranging reform
of the tax code next year, but the US Embassy notes
little relationship between tax reform and the
Maekawa proposals. The planned combination of
income tax cuts and indirect tax increases will
probably result in little net stimulus to the economy.
? Mill's industrial restructuring program is de-
signed to phase out uncompetitive segments of the
steel and textile industries and to shift the resources
to more productive, but not necessarily domestic-
market- oriented, sectors.
Secret
DI IEEW 86-047
21 November 1986
I Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
25X1
25X1
25X1
I I
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Japan: Common Themes of Recent Trade Packages, 1982-86
Measures Proposed for Study
or Implementation
May January October April December April July Maekawa
1982 1983 1983 1984 1984 1985 1985 Report
Tariff cuts
Standards and certification improvements X X
Low-cost import financing X
Financial liberalization
X
Expanded agricultural imports X
X
Improved distribution system X
Increased government procurement of
foreign goods
Housing incentives
? Tokyo is drafting a new five-year plan for the coal
industry that recommends cutting its already small
domestic production by one-third to reduce high
government subsidies. Moreover, the relatively high
cost will discourage increased Japanese imports of
US coal.
? Japanese companies are increasing overseas invest-
ment?a process accelerated by the strong yen.
MITI sees this as a counterpart of industrial re-
structuring as well as an outlet for funds generated
by the trade surplus. Growing overseas investment
also suggests Japanese companies see continued
weak domestic demand and therefore anticipate
better profits elsewhere.
Measures more likely to expand domestic spending?
such as substantial tax reduction, increased public
investment, tax incentives for housing, and liberaliza-
tion of the heavily subsidized agricultural sector?
show little sign of being implemented soon.
Maekawa Over the Long Haul
Over the next year, the Maekawa framework is most
likely to survive as a tool for managing the US-Japan
economic relationship. Recent discussions in govern-
ment ministries and the ruling party?which have
Secret
focused largely on the public relations aspects of the
Maekawa proposals?support this view. After Naka-
sone steps down as prime minister?his current term
expires in October 1987?the overall Maekawa pack-
age will probably fade away, as have many other
reports by Japanese study groups. In fact, the bias in
favor of other, more widely supported policies that
would contribute to the demise of the Maekawa
approach is striking. In particular, the underpinnings
of Japan's current economic policy?marked by a
focus on budget austerity and small government?
remain strong:
? Keidanren, the prestigious big business organiza-
tion, continues to hold that the private sector would
not be able to generate an acceptable level of
economic growth in the face of the higher taxes
needed eventually to pay for deficit financing.
? Japanese bureaucrats and politicians believe Tokyo
must slow the growth of the national debt now to
prepare for the onslaught of additional payments to
support a rapidly aging population in the 1990s.
These views were strongly represented this summer
in the final report of the Administrative Reform
Council, the group largely responsible for "selling
budget austerity."
4
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
1
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Key Maekawa Recommendations: A Report Card
Recommendation Impact
Comment
Expand domestic demand
Boost housing construe- Reduce
tion and public works
Current pump-priming plan contains a few minor housing incentives. FY87 budgets
may contain modest increases in public works spending.
Stimulate consumption by Reduce
tax cuts, higher wages,
and shorter hours
Little sign yet of consumer-led recovery. Lower oil prices and strong yen have not had
major impact on consumer prices. Planned tax cuts may have little impact on
consumer spending because people expect a comparable indirect tax.
Transform the industrial structure
Rationalize depressed in- Reduce
dustries, including textiles
and coal
Political pressure and special interest groups slowing plans to phase out uncompetitive
industries, such as some textiles. New industrial restructuring law likely to enhance
competitiveness rather than encourage firms to switch to the domestic market.
Ease restrictions on agri- Reduce
cultural imports, except
rice and wheat
Most controversial Maekawa recommendation; Nakasone has expressed interest in
reforming the price support system for wheat and rice, but any change would be
gradual and long term.
Encourage outward for- Unclear
eign investment
Tokyo has provided a few tax and loan incentives, but the primary impetus for foreign
investment?especially in the United States?appears to be a combination of
protecting export markets, exploiting new technological developments, and taking
advantage of the weak dollar.
Improve market access
Implement 1985 action Reduce
program designed to ease
import barriers
Sticking to action program timetable. Imports of manufactures?especially interme-
diate goods from Asian NICs?have risen briskly.
Streamline distribution Reduce
system
Currency stabilization and financial liberalization
No substantive action taken. Lack of competition within the multilayered distribution
system has kept retail prices of imports from falling in line with yen appreciation.
International cooperation Unclear
on exchange rates
Further liberalize finan- Increase
cial markets
Policymakers and major corporations expect a yen in the range 150 to 160 per dollar.
Some businesses are planning for 130 yen despite recent US-Japan agreement.
Extensive moves in recent months to liberalize capital outflows. Continued foot-
dragging on allowing overseas financial institutions into the Japanese market reflects
Tokyo's concerns over the stability of the banking system.
Increase international cooperation
Expand imports from
LDCs
Unclear
Yen appreciation has boosted imports of intermediate goods such as steel from South
Korea and Brazil. However, progress in raising imports of commodities or final
manufactured goods from LDCs has been minimal.
Expand foreign aid
Unclear
Tokyo has adopted the goal of doubling aid in the next seven years?in dollar terms.
If the yen remains strong, Tokyo should have little trouble meeting this goal. Strong
yen would make success likely but would increase burden on LDC yen debts.
New GATT round Unclear
Fiscal and monetary management
Tokyo supports most US positions but is wary of agricultural negotiations.
Implement fiscal policy Reduce Economic slowdown has generated calls for temporary stimulus but desire to shrink
flexibility
the public sector remains.
Abolish tax-free interest Unclear Tokyo's Tax Advisory Council recommended low tax on interest income as part of
1987 tax reform. Proposal faces tough political opposition.
for small savers' accounts
Use monetary policy to Unclear
expand domestic demand
The Bank of Japan cut discount rate for the fourth time this year on 1 November.
Lower interest rates are aimed principally at weakening the yen.
Our judgment of the likely trade impact of the Maekawa
proposals?if implemented?on the current account balance.
5 Secret
I Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
I I I
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Japanese Economic Prospects: How Bad Are They?
The yen's strength is conditioning Japanese economic
prospects for 1986, making it virtually impossible for
Japan to achieve the government's official forecast of
4-percent real GNP growth, much less to rival the 4.5
percent achieved last year. Indeed, we expect econom-
ic growth to slow to approximately 2 percent this
year, the worst performance since 1975. Our pessi-
mism is widely shared by private forecasters in Japan
and reflects the toll the strong yen is taking on the
foreign sector's contribution to growth, which in
recent years has amounted to more than one-half of
the total.
? Despite Japanese manufacturers' willingness to
lower the yen prices of their goods in an attempt to
maintain overseas sales, Japanese export volumes
have been declining gradually for the past six
months. Price and quantity decreases are cutting
manufacturers' earnings and production. This in
turn is forcing export-related manufacturing
firms?such as auto and electrical appliance manu-
facturers?to trim investment spending
considerably.
? In addition, lower import prices are drawing in
intermediate goods, such as steel from the Asian
NICs, which also hurt Japanese manufacturing.
Imports of US manufactures have not increased
much, however.
Domestic demand, moreover, has not yet risen to
compensate for the yen's deflationary impact on trade
and growth. Low wage settlements have dampened
private consumption, and Tokyo's austere fiscal poli-
cies have limited the stimulus provided by the public
sector.
The major question now is whether, over the next
year or two, the Japanese economy will adjust suffi-
ciently to a 150-yen-to-dollar exchange rate to allow
growth to return to the more politically palatable
3-percent level. At present, most observers expect it
will?a judgment with which we concur. Although
weak exports will continue to restrain growth in
1987, we anticipate domestic demand will rebound
somewhat. Simulations done using our econometric
model of Japan suggest that real GNP will increase
about 3 percent next year. The current account
surplus will probably fall to about $75-80 billion
from the projected $85 billion this year. (We expect
the Japanese Government is looking at similar num-
bers, as our model is based on one built by Tokyo's
Economic Planning Agency). Underlying the relative-
ly upbeat forecasts are assumptions that real incomes
will rise as a result of yen appreciation and that
investment in non-export-related industries?such as
services and gas and electric utilities?also will
steadily increase.
Despite general agreement that Japan will proba-
bly?given time?be able to digest a strong yen, some
private forecasters are bearish about prospects for
next year. Mitsubishi Research Institute, for exam-
ple, recently lowered its 1987 real GNP forecast to
1.7 percent, or 0.5 percentage point below its predic-
tion for this year. If Mitsubishi is correct in its
assessment that 1987 will be worse, Tokyo will face
some tough macroeconomic policy decisions.
Secret
6
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Moreover, there is a school of thought that argues
that Japan cannot afford to rely largely on its domes-
tic market to generate growth as it approaches a
critical demographic and economic juncture created
by the "graying" of the population. Saburo Okita,
former Foreign Minister and a respected economics
authority in Japan, is the most prominent advocate of
this view. Okita argues that institutional and cultural
factors, such as the high savings rate, keep domestic
spending well below the level needed both to approach
full employment and to support productivity-enhanc-
ing investment. In his view, growing exports represent
the only alternative to slow growth and rising unem-
ployment. To fend off criticism from Japan's trading
partners, Okita argues that Japan must recycle its
trade surpluses as increased foreign aid and overseas
investment.
Outlook
Some economists argue that the recent appreciation of
the yen?up roughly 50 percent against the dollar
over the past year?sets the stage for a macroeconom-
ic policy shift, but we disagree. Despite the fact that
yen appreciation is clearly hurting the economy today,
Japan?in our view and that of most observers?can
adjust as effectively to the strong yen as it did to the
energy shocks of the 1970s.
Although some additional fiscal stimulus is likely in
the attempt to ease the impact of the strong yen, the
overall approach will probably remain fiscal austerity.
We expect any additional spending to be temporary
and to concentrate on public works?such as roads
and bridges?that would minimize the long-term
costs associated with pump priming. Depending on the
tactics of the political opposition, the ruling party and
Finance Ministry might also agree to accelerate
planned income tax cuts and perhaps delay the intro-
duction of a revenue-enhancing indirect tax, hoping
the net effect would encourage consumer spending.
The impact on the economy of such moves would be
minor, in our view.
If we and the Japanese who expect the economy to
pick up by mid-1987 have underestimated the nega-
tive impact of yen appreciation, a reorientation of
7
Japan: Growth in Real GNP, 1983-87
Percent
6
0
1983
"CIA projection.
84
85
86"
87"
310974 118?
economic policy toward domestic growth could occur.
Under tougher circumstances, the departure of Naka-
sone?a staunch supporter of budget austerity?may
make it easier for others to advocate policies, induct-
ing fiscal stimulus, to offset the loss in export sales.
Nakasone's likely successors, with the possible excep-
tion of former Finance Minister Takeshita, are not as
philosophically wedded to fiscal conservatism. If
gloomy economic prospects coincide with a sharp
upsurge in protectionism, the move to foster domestic
growth would gain considerable ground.
Secret
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
25X1
25X1
25X1
25X1
25X1
.1 I
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
R
Next 1 Page(s) In Document Denied
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X6
25X1
25X1
25X1
25X6
25X6
25X6
25X1
25X6
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Nigeria: Launching
Economic Reforms
After five years of resisting significant economic
adjustment in the face of plunging oil revenues,
Nigeria recently has embarked on an economic re-
form program to pave the way for a reconciliation
with its official and commercial creditors. Since
September, Lagos has initiated a second-tier foreign
exchange market, liberalized trade controls, and tak-
en steps to reduce its bloated bureacracy. Such re-
forms were outlined in a letter of intent signed with
the IMF last September and could lead to a formal
standby agreement by yearend. Meanwhile, the
World Bank, official bilateral creditors, and commer-
cial lenders are at various stages of agreement on new
loans and debt reschedulings. Nevertheless, the antici-
pated financial relief will not compensate fully for the
halving of oil export earnings this year, and Nigeria
almost certainly will suffer continuing economic stag-
nation and a further decline in living standards.
Unless oil prices rebound significantly in 1987, Presi-
dent Babangida's government probably will face
growing political pressure to extract more concessions
from creditors, or even to unilaterally limit debt
payments and abandon the reform effort.
Long Road to Reform
Nigeria has suffered a critical foreign payments
problem over the past five years. Oil exports?which
account for more than 95 percent of foreign exchange
earnings?have dropped from $25 billion in 1980 to
an estimated $6 billion this year. At the same time,
payment obligations on Nigeria's $20 billion external
debt have risen steadily to more than $5 billion per
year, according to the US Embassy. Three successive
governments, including the present Babangida re-
gime, had attempted to muddle through without
implementing an IMF program, the usual prerequisite
for obtaining commercial and official debt reschedul-
ings. Since 1981, imports have been slashed by about
70 percent, foreign exchange reserves drained by over
80 percent, and domestic fiscal policy tightened be-
cause of the cash-flow bind. The austerity contributed
to a cumulative 15-percent drop in real GDP, short-
ages of basic goods, and rising unemployment.
Secret
Lagos, however, avoided making other adjustments?
primarily devaluing its currency?that were recom-
mended by the IMF and other creditors. Nigerian
officials had stated throughout the crisis that an IMF
program was a prescription for upheaval, because a
devaluation would sharply increase prices for foods
and other basic commodities.
the government did not want
to correct the currency's overvaluation, because it
provided opportunities for illegal profiteering. Al-
though Babangida sought a popular mandate to nego-
tiate with the Fund shortly after he assumed power in
a coup last year, a torrent of public criticism forced
him to back away from the IMF option by December,
according to the US Embassy.
Nigeria's foreign payments situation became unsus-
tainable with the sharp drop in oil prices in early
1986, and the regime announced in January that it
would seek to limit debt service to 30 percent of
export earnings. By April, Lagos had halted most
payments on outstanding letters of credit, obtained a
standstill on medium-term commercial debt pay-
ments, and begun to reassess its go-it-alone strategy.
Babangida unveiled an economic reform program in
June that significantly resolved longstanding obstacles
to an IMF accord, but publicly avoided the issue of a
possible Fund agreement. According to the Embassy,
the proposed reforms triggered only a mild popular
reaction, and the government subsequently pursued
intense behind-the-scenes consultations with the IMF,
the World Bank, and other creditors. In September,
the regime announced it had signed a letter of intent
on an economic adjustment program with the IMF
and would seek a formal standby agreement. Officials
publicly claimed, however, that the IMF had merely
consented to a program conceived by Lagos, and that
the government would not actually borrow the money
available under a standby. According to the US
Embassy, this announcement also drew little hostile
response from the public, and by the end of the month
La os be an implementing the long overdue reforms.
11
Secret
DI IEEW 86-047
21 November 1986
I Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
25X1
25X1
25X1
25X1
25X1
25X1
I I I
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Nigeria: Selected Economic Indicators,
1980-86
Note scale change
Real GDP Growth
Percent
3
0
-3
-6
-9
Debt Service'
Billion US $
6
Exports
Billion US $
30
20
10
0
1980 81 82 83 84 85 86
'Data for 1986 are obligations.
b
Estimated.
311021 11?86
The Reform Package
The centerpiece of Nigeria's program is a second-tier
foreign exchange market, intended to gradually deval-
ue the currency, which officially traded at more than
three times the black-market rate. Foreign exchange
for all uses other than official debt payments is sold at
weekly auctions, which so far have resulted in a
56-percent devaluation. The fixed first-tier rate also
has been devalued by 24 percent since late September.
The IMF reports that Lagos plans to merge the two
systems by mid-1988, after which all transactions
would occur at a unified, floating rate. The Embassy
reports that financial officials took steps to reverse
some of the decline in the second-tier rate, however,
after it plummeted by 70 percent in early October,
and have pledged to alter the rate again if it becomes
"unacceptable." Prices for some consumer goods did
jump by as much as 200 percent because of the
devaluation, according to the Embassy, but this did
not provoke any significant popular backlash.
The government also has taken steps to liberalize its
trade policy. The Embassy reports that Nigeria's
graft-ridden import licensing system, which had been
used to allocate scarce foreign exchange, is being
dismantled with the advent of the second-tier market.
Lagos also repealed a 30-percent import surcharge?
helping offset some of the inflationary effects of the
devaluation?and lowered tariffs on a range of goods.
A ban on imports of many agricultural commodities
remains intact, however, in an effort to encourage
greater domestic production. Other aspects of the
reform program include plans to reduce government
involvement in the economy. According to the Embas-
sy, Lagos already has abolished some agricultural
marketing boards and consolidated its rural develop-
ment agencies. IMF reports indicate that the govern-
ment plans to divest a number of parastatals and to
reduce subsidies for those it retains.
Reconciling With International Creditors
The IMF letter of intent and the understanding that a
formal standby arrangement will soon follow have
opened the door for new loans and debt reschedulings
with commerical and official creditors. Although the
Secret 12
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
1
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
London Club of commercial bankers had consented to
a standstill on medium-term debt payments last April,
they balked for months at providing new money and
rescheduling debt unless Lagos signed, and drew
money from, an IMF standby. According to Embassy
reporting, IMF and World Bank officials accepted
Babangida's argument that domestic political condi-
tions precluded actual borrowing from the Fund and
helped convince bankers to require only that a stand-
by agreement be signed. As a result, the London Club
steering committee agreed last week to lend Nigeria
$320 million, reschedule $1.5 billion in medium-term
debt falling due this year and next, and convert an
estimated $2-3 billion in overdue payments on letters
of credit into medium-term debt, according to US
officials
This preliminary agreement with commercial credi-
tors will allow disbursement of a $450 million World
Bank loan to help fund the second-tier market. The
Embassy reports, however, that the IMF has put off
consideration of a standby until a "critical mass" of
Nigeria's commercial lenders?probably 80 to 90
percent?participate in the new money package of-
fered by the London Club steering committee, a
process that may not conclude before yearend. More-
over, the final $100 million disbursement of a $250
million bridge loan provided in October by official
bilateral creditors, including the United States, and
negotiations for a Paris Club debt rescheduling await
final approval of the IMF accord.
Outlook
We believe Lagos is likely to reach final agreements
with all official and commercial creditors by early
1987 and will probably continue its economic adjust-
ment program through the year. The potential finan-
cial relief, however, will not compensate entirely for
this year's slide in oil prices, which will cost Nigeria
almost $6 billion in export revenues. Although the
recent reforms will allocate foreign exchange re-
sources more efficiently and encourage the long-term
development of nonoil exports, Nigeria's economic
fortunes will remain closely tied to fluctuations in the
world oil market. At current production levels, a
change of $1 per barrel translates to $400 million in
13
Secret
annual exports, whereas nonoil exports will continue
earning less than $1 billion annually for the remain-
der of the decade, according to IMF projections.
In the absence of a sustained rebound in oil prices
next year, the economy almost certainly will remain
stagnant, and living standards will continue to de-
cline. Moreover, even with anticipated reschedulings,
debt service payments are likely to remain onerous.
Babangida probably will be tempted to start drawing
money from the expected IMF $790 million standby
and may request further reschedulings and increased
lending from other creditors.
The regime has encountered little domestic resistance
to its program so far, but will probably feel growing
pressure over the next year from the military, disaf-
fected urban elites, and other interest groups to
demonstrate some visible benefits from its new poli-
cies. Economic decay contributed to the downfall of
the two previous governments and almost certainly
could significantly weaken Babangida's grip on pow-
er. If the regime becomes increasingly preoccupied
with combating threats to its survival, it could decide
to revert back to a go-it-alone economic policy, impose
unilateral limits on debt service payments, and aban-
don the fledgling reforms.
Secret
I Declassified in Part - Sanitized Copy Approved for Release 2012/01/25 : CIA-RDP97-00770R000100670001-9
25X1
25X1
25X1
25X1
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25 : CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
El Salvador:
Economic Impact of
the Earthquake
The earthquake that struck San Salvador last
month?leaving an estimated 1,000 dead and more
than 10,000 injured?will further burden a govern-
ment beset by severe economic problems and a de-
structive seven-year insurgency. Although the disaster
probably will limit economic growth in the next two
years and increase the risk of instability, it also may
encourage an exodus of refugees from the overcrowd-
ed capital and foster greater cooperation between the
government and the private sector. In large measure,
El Salvador's ability to recover from the earth-
quake?while maintaining its war effort?will depend
on the government's success in generating new sources
of development assistance and on continued economic
and military aid from the United States.
Earthquake Reconstruction
The need for investment capital and credit will be
enormous in a country where private investment
historically has been depressed and the public sector
has absorbed a large share of credit resources. Prelim-
inary assessments by US officials indicate that
losses?primarily damage to property?may exceed
$1.3 billion.
The government's reconstruction plan focuses on
housing?the most pressing need and the most likely
source of popular unrest. The program will be admin-
istered by a committee, composed of government-
appointed representatives from the armed forces, la-
bor, the private sector, the municipality, and the
central government. The plan, funded by $50 million
in supplemental US assistance, is designed to stimu-
late the economy in the short term?by generating
employment and restarting local economic activity?
until more permanent rebuilding efforts begin. Fi-
nancing currently available to start long-term recon-
struction consists of funds reprogramed from planned
projects. These include $30 million from the Inter-
American Development Bank for health and infra-
structure projects, a $10 million education loan from
the World Bank, and $25 million from West Germa-
ny.
15
Secret
25X1
Earthquake Damages
Housing: About 250,000 people?some 20 percent of
San Salvador's population?are homeless. Most of
the 50,000 families affected were among the city's
poorest residents, with no financial stake in rebuild-
ing their homes?a factor that will further compli-
cate reconstruction efforts.
Government facilities: Forty government buildings
suffered extensive structural damage and 14?affect-
ing six ministries?are now uninhabitable.
Infrastructure: The damages to water, sewer, electric, 25X1
and telecommunications facilities total over $10 mil-
lion, according to preliminary government estimates.
Except for some continuing water shortages, basic
services have been largely restored. More than 150
kilometers of underground water pipes will have to be
replaced, and many streets and bridges will need
repairs.
Hospitals and schools: Three of the city's major
hospitals require extensive or complete reconstruc-
tion. Preliminary Embassy estimates indicate that
costs to rebuild and reequip these facilities will be
$100 million. Schools will also require major recon-
struction, with repair costs estimated at $15 million.
Private sector: Some 160 commercial establishments
were destroyed or damaged, and an additional 300
large buildings will require restoration, according to
US Embassy reporting. Preliminary estimates indi-
cate that the private sector suffered losses totaling
$675 million, largely uninsured.
25X1
Military: Embassy and defense attache reporting
indicates that military facilities were hit hard. The
Embassy estimates that approximately three-fourths
of command facilities in the capital area were de-
stroyed. Preliminary estimates of reconstruction
costs exceed $100 million.
Secret
DI IEEW 86-047
21 November 1986
, Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
I ? , . I I
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Increased Economic Burden
The earthquake will probably have a negative impact
on economic growth for the next several years. The
Central Bank's estimate for real GDP growth in
1986-1.3 percent before the earthquake?has been
scaled back to 0.6 percent, and we believe the actual
figure will be closer to zero. Potential growth in 1987
and 1988 will depend on San Salvador's ability to
attract new foreign aid and investment. In our opin-
ion, it seems unlikely that the average annual
3-percent growth?needed to reverse the decline in
per capita income?will be possible during the next
two years of reconstruction, even under optimal condi-
tions. Although the earthquake had little impact on
the agricultural sector, production of traditional crops
remains depressed because of low world prices, a lack
of investment, and the effects of the insurgency.
The earthquake will exacerbate fiscal and foreign
payments problems, while significantly increasing in-
flationary pressures?the inflation rate is currently
about 30 percent. The budget deficit?forecast at
$100-160 million at midyear, according to the US
Embassy reporting?will be further strained by the
need to replace government facilities while providing
essential services. The need for massive amounts of
imports to facilitate reconstruction will further weak-
en the current account, and put additional pressure on
an already overvalued exchange rate. Embassy fore-
casts before the earthquake projected a foreign pay-
ments deficit for 1986 in excess of $200 million.
Although reconstruction eventually will provide many
new jobs, unemployment is likely to increase substan-
tially in the short term. The widespread damage to the
informal economy?street vendors, workshops, and
stores?has hit poor and unskilled workers the hard-
est. USAID reports that preliminary surveys indicate
as many as 20 percent of the heads of households in
affected areas may lose their jobs.
Opportunities and Challenges for the Government
Despite the destruction and the economic burden of
recovery, the disaster may benefit the economy over
the long term. Initial infusions of earthquake relief
Secret
El Salvador:
The Earthquake Recovery Program, 1986
Program
Amount
(million
US $)
Description
Employment gen- 4
eration/clean up
20,000 affected persons?hired and
supervised by private firms?to
clear rubble.
Credit for reha- 10
bilitation of small
enterprises
Loans to be used for reconstruction
or repair of buildings, replacement
of tools and machinery, working
capital, or suppliers' credit.
Housing
Temporary
shelter
12 Provide shelter and sanitary facili-
tis for up to one year for 20,000
renter families.
Building
materials
3
Purchase and deliver building ma-
terials?tin roofing, lumber, and
nails?for up to 10,000 squatter
families.
Home repair/ 16
reconstruction
credit
Special line of credit to over 8,000
families with homes or home sites
to finance repairs or begin recon-
struction on existing property.
Repairs to
public services
5
Upgrade temporary hospital facili-
ties, provide temporary school shel-
ters, restore utilities, and repair
roads.
may enable San Salvador to gain access to new
sources of foreign development aid, a prospect height-
ened by the regionwide strengthening of democratic
processes.
Longstanding housing and unemployment problems in
the capital may be eased somewhat by displaced
persons returning to the countryside. Embassy report-
ing indicates that as many as 10 percent of the
homeless?the majority were slum dwellers?have
already left the capital or moved in with relatives. In
our view, the earthquake destruction may alleviate
population pressures caused by refugees if the govern-
ment is able to guarantee the safety of people return-
ing to former combat areas
16
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
The government will have to balance resource alloca-
tion between reconstruction needs in the capital and
rural development programs in the countryside. Presi-
dent Duarte has assured armed forces commanders
that funds for the military's civic action program?
designed to restore services and rebuild former com-
bat areas?will not be diverted to the capital. In
addition to attracting the newly displaced from San
Salvador, a continued commitment to rural civic
action will aid in retaining would-be job seekers who
had considered moving to the capital in search of
reconstruction work, the US Embassy reports.
The earthquake also has created new opportunities for
reconciliation between the government and the private
sector. Embassy reporting indicates unprecedented
cooperation between these two historic foes in the
aftermath of the disaster. Duarte moved quickly to
involve businessmen in the relief effort, tasking them
with receiving and accounting for all aid contribu-
tions. We believe that current levels of good will are
unlikely to persist as normal affairs resume. Nonethe-
less, an opening exists to eliminate some of the rancor
that has characterized the government?private-sector
relationship?a prospect that would significantly im-
prove the chances for economic recovery. Opposition
to Duarte from the business community and the
political right could increase, however, if they per-
ceive his reconstruction plan is aimed at enhancing his
popularity or is fostering greater public dependency
on government programs at the expense of private
enterprise.
Perceptions that the government is not doing all it can
for earthquake victims could quickly lead to greatly
increased popular unrest. Insurgents and sympathetic
front groups are actively accusing the government of
corruption and misconduct in its handling of the
earthquake, according to the US Embassy. Failure to
meet the expectations of the displaced for new and
better housing and improved delivery of services could
fuel popular concern about the administration's in-
competence and dishonesty.
So far, San Salvador's performance in disaster relief
matches the Guatemalan Government's quick, compe-
tent, and honest handling of relief efforts following
the 1976 earthquake, which caused far more damage.
17
Guatemala City was helped, however, by a rapidly
expanding economy?a luxury that El Salvador does
not enjoy. In contrast, widespread perception of gov-
ernment insensitivity and gross corruption following
the devastating earthquake in Nicaragua in 1972 is
widely believed to have been a major factor in the
Sandinistas' eventual victory over Somoza.
Implications for the United States
San Salvador will continue to look to the United
States, not only to sustain current levels of economic
and military assistance, but also to provide supple-
mental aid for reconstruction. In particular, we expect
that the armed forces will ask the United States to
increase military aid to help replace damaged facili-
ties and will petition Washington to pressure the
civilian government to maintain its focus on the war
effort.
US efforts to support the government could be seri-
ously undermined if the government is perceived to be
inefficient or corrupt in its reconstruction efforts.
Unrest fueled by guerrilla propaganda or the activi-
ties of rebel front groups--especially among the dis-
placed in the capital?would increase the possibility
of instability or radical change.
Secret
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
25X1
25X1
25X1
25X1
25X1
25X1
I I
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Increasing Consolidation
in the International
Telecommunications Industry
The global telecommunications industry is undergoing
a period of rapid change as firms struggling to reduce
R&D costs and increase global sales are turning to
international joint ventures, mergers, and other coop-
erative agreements. Over the last decade, the cost of
developing switching technology?the cornerstone of
the public communications network?has mush-
roomed while the time between generations of switch-
ing systems has shortened considerably. In addition,
the battle among switch suppliers for a potential
$90 billion in sales through 1990 to national telephone
authorities and other telephone companies has intensi-
fied. We believe that West European and Asian firms
are seeking joint ventures with US telecommunica-
tions firms because of the strength of US switching
technology and the size of the US market.
The Coming Shakeout in Switching Equipment
We believe that consolidation among the major tele-
communications corporations' will continue, particu-
larly in Western Europe, where eight manufacturers
are competing in a region that constitutes only 30
percent of the world market. The same pressures will
surface in Japan where the privatized Nippon Tele-
graph and Telephone (NTT) will be less likely to
sustain three major Japanese suppliers.
Increased competitive pressure on switch manufactur-
ers comes in part from changing technological and
market forces:
? High development costs. According to industry
experts, the latest generation of digital switching
equipment costs approximately $1 billion to develop
over about a 10-year period. Roughly 70 percent of
this cost is for software.
the major telecommunications equipment manufacturers are, by
country: Northern Telecom (Canada); CIT-Acatel (France); Sie-
mens (West Germany); Italtel and Telettra (Italy); Fujitsu, Hitachi,
and NEC (Japan); AT&T-Philips (Netherlands); L. M. Ericsson
(Sweden); AT&T, GTE, IBM and ITT (United States); GEC and
Plessey (United Kingdom).
19
? Shortened product cycles. Industry trends show that
sophisticated demands from users, the technological
push toward digitization, and the momentum of
deregulation are pressuring manufacturers to pro-
duce upgraded equipment in 10 to 15 years. Previ-
ous generations of switching gear had a replacement
schedule of 30 to 40 years. While new features can
be added to existing switching equipment, the re-
quired software modification is expensive and time
consuming.
? Reduced profit margins and overcapacity. Slower
market growth is also putting competitive pressure
on switch manufacturers.
25X1
25X1
Many industry experts believe a minimum of 10 to 12 25X1
percent of global sales is necessary if a manufacturer
is to stay competitive in the digital switch market. In
our view, those suppliers that fall short will probably
consider reducing their involvement in the switch
business, securing extensive government support, or
seeking a strategic partner. 25X1
Motivations and Strategies
Companies electing to stay in the switch business with
minimal government support will most probably rely 25X1
on international linkages. AT&T, Philips, and North-
ern Telecom are among the most active firms in
forming telecommunications ventures. We believe the
two strongest motivations for telecommunications
firms to team are technology sharing and market
access. 25X1
Technology Sharing. In the last six years, West
European telecommunications equipment manufac-
turers have concluded several agreements with US
firms and brought US technology into the European
market. Today, the AT&T-Philips venture, called
APT, markets the US firm's top-of-the-line central
office switch in the Netherlands, capturing 65 percent
Secret
DI IEEW 86-047
21 November 1986
. Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
25X1
. I I
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Selected Linkages in the Telecommunications
Industry, 1986
? Switching, PBX or Nework Systems
Semiconductor/components
- Other a
Major telecommunication firms
Asia
Gold Star Semiconductor, 1980
Gold Star Cable, 1984
DGT-ROC. 1984
Ricoh. 1985
Toshiba. 1986
Kyocera. 1985
China. 1985
North America
AT&T
Turkey. PTT. 1980
Daewoo, 1983
Mitsui. 1983
Other ventures in telecommunications equipment include
optical fiber development, data communications equipment
production. or radiotelephone equipment production.
Harris, 1985
West Europe
Philips, 1983
Olivetti, 1984
Enidata, 1984
Telefonica. 1985
Siemens, 1986
CGE-ALCATEL, 1982
Northern Olivetti, 1981
Telecommunications
GE, 1983
Motorola, 1986 --
GTE. 1982
Intecom, 1984
Telenokia, 1985
ITALTEL, 1985
Pirelli, 1981
CGE-ALCATEL, 1982
of the market. According to US Embassy reporting,
the GTE-Italtel venture, Italcom, has become a regu-
lar supplier to the Italian Post Telegraph and Tele-
phone (PTT) authority and enjoys a 20-percent mar-
ket share there. Compagnie Generale d'Electricite
(CGE)?which is pursuing a joint venture with ITT?
at one time led Europe in digital switching technology
Secret
310363 11-86
through its affiliate Alcatel. Now that technology is
more than 10 years old. Some industry analysts
speculate that the French company could not afford
the research required for a new line of switches, and
thus sought a partner, ITT, with an established
advanced product.
20
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25 : CIA-RDP97-00770R000100670001-9
Partnership Terminology
Among the variety of business activities between
firms are:
? Joint ventures in which new companies are formed
to manufacture or distribute a product jointly.
? Original equipment manufacture (OEM) agree-
ments, in which one company manufactures the
product and another company handles sales, distri-
bution, maintenance, and service.
? Research and development agreements in which
companies jointly perform research and develop
new technologies and products.
? Equity positions in which firms own portions of
other companies.
? Licensing agreements in which one company pays
another for the right to produce the other's propri-
etary products.
? Cross licensing agreements in which companies
license each other for their respective products.
Other cooperative agreements include technology
transfer in the form of patent exchanges and technical
assistance.
Market Access. Agreements for market access are
designed to achieve the minimum market share neces-
sary to remain competitive. These agreements fre-
quently involve switch manufacturing technology or
component/semiconductor technology sharing by the
foreign firm in exchange for entering the local mar-
ket. Demand for telecom equipment is expected to
total some $90 billion through 1990, with the United
States and Canada purchasing $50 billion, Western
Europe $30 billion, and Japan $10 billion,
a
viable strategy entails a competitive position in two of
the three regions.
The most widely connected West European firm is
Philips. Philips's most significant partnership in tele-
communications is the APT effort to adapt US
switching systems to the European market. Moreover,
Philips has a longstanding presence in many Third
World countries, thereby adding to AT&T's potential
sales. Separately, Philips continues to pursue its busi-
ness in data communications systems in the United
21
Secret
States, mobile radio with French and Spanish part-
ners, and components in Europe and the Far East.
Of all the major foreign switch manufacturers,
Northern Telecom probably has the best market
position in Japan, having concluded in 1986 the first
foreign, multiyear, multiswitch contract with NTT.
Northern Telecom also enjoys a strong number-two
position in the North American switching market and
has concluded other agreements largely for market
access. Switching and microcomputer partnerships
with smaller firms in Japan, Turkey, and Finland are
examples.
Going It Alone. Japanese telecommunications compa-
nies?Fujitsu, Hitachi, and NEC?in general do not
enter into foreign partnerships in telecommunications.
The major Japanese telecom companies do, however,
cooperate extensively with each other in the early
stages of both research and manufacturing, often
under NTT sponsorship. Fujitsu's only current joint
venture in telecommunications?the acquisition of
GTE's Business Systems Division, which makes
PBXs?is more a vehicle to enter the US market.
NEC, the premier Japanese telecommunications com-
pany, has no significant ventures in switching to date.
We believe reluctance by the Japanese switch manu-
facturers, Fujitsu and NEC, to expand beyond the
Japanese market through technology-sharing relation-
ships may delay their success as global switch suppli-
ers. In addition, foreign vendors are making some
headway in Japan and NTT has begun procuring on a
more competitive basis.
Outlook
We believe firms that can operate on a global basis
will be in the strongest position to survive industry
consolidation, in the absence of extensive home mar-
ket protection. Foreign sales are needed to help defray
Secret
I Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
25X1
25X1
25X1
25X1
9)(1
25X1
25X1
25X1
, I I
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
continuing switch development costs as well as to
facilitate technology exchange, product complemen-
tarity, and market access.
Telecommunications officials predict that major firms
not linked into a consortium or a major partnership in
the next 5 to 10 years will see a decline in their
competitive positions. The formation of large telecom-
munications partnerships?and the departure of some
companies from the business altogether?indicates
the shakeout predicted by industry experts is under
way. Currently, England's Plessey and GEC and
Sweden's Ericsson have not concluded any major
telecommunications partnership arrangements.
We believe the greatest consolidation will take place
in Western Europe where fragmented national mar-
kets and country-specific technical standards have
kept any one firm from a dominant position. Although
European firms in search of technology make attrac-
tive partners for US firms in search of markets, at the
same time they represent US know-how, production,
and employment moving overseas to support these
ventures. This is one aspect of partnering the
Japanese and others have sidestepped by going it
alone.
West European and Asian firms will probably contin-
ue to seek US telecommunications firms as partners
in telecommunications ventures because of the
strength of US switching technology and the size of
the US market. There is as yet, however, an apparent
absence of cooperation between Europe and Asia. As
consolidation and limited competition come to domes-
tic markets in Europe, we believe Japan could offer
attractive technology and market opportunities.
Secret 22
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Egyptian-IMF
Negotiations
Approaching
Crunch Point
Y Mexican Capital
Flight Measure
Proves Disappointing
Portugal Plans
Early Debt Repayment
Secret
Briefs
International Finance
The IMF team visiting Cairo has warned Egyptian officials that they must quickly
present new and more far-reaching economic reform proposals to avoid an impasse
over a standby agreement. Fund representatives reportedly are also insisting that
Cairo abandon its gradualist approach and adopt major policy adjustments
simultaneously, which the Egyptian Government adamantly opposes. Nonetheless,
Egyptian officials have promised a new reform draft by this weekend?before the
IMF delegation leaves?to keep standby prospects alive. Prospects for a satisfac-
tory Egyptian response, however, are not bright. Even if Cabinet experts can agree
on reform measures, the package will need Mubarak's approval, and the President
fears that resulting price increases will lead to widespread political unrest.
Persuading him will require a concerted effort by the Cabinet and Prime Minister
Sidqi and time?which Egypt may not have.
The savings instrument created by the Mexican Government to battle capital
flight?the pagafe?has had little success since its introduction four months ago.
The device was created by the Treasury to stem capital flight and encourage
domestic savings by adjusting returns to movements in the controlled exchange
rate. Pagafe yields, however, are not competitive with those on savings deposits in
the United States. Moreover, failure to keep exchange rate adjustments in step
with inflation also has hurt sales. In fact, only 33 percent of pagafes offered were
sold in September and none were purchased in October, according to the US
Embassy. In our view, Mexico City is unlikely to raise yields on pagafes enough to
discourage citizens from pursuing US investment opportunities.
Portugal's improving current account balance has paved the way for the second
early repayment this year of some of the country's $16.6 billion foreign debt. Bank
of Portugal Governor Tavares Moreira announced that the government will take
advantage of the projected $1-1.3 billion current account surplus to repay the $190
million outstanding on a 1980 loan ahead of schedule. Lisbon reduced its foreign
debt in the first half of 1986 to the same level as in December 1985 and has cut its
debt service burden by $1.7 billion. Lower oil prices have been a major factor in
the current account improvement?Portugal's oil import bill fell 57 percent in the
first half of 1986 compared with the same period last year. The decline in the US
dollar has also helped because more than one-half of the foreign debt is
denominated in dollars. We believe that improving external conditions will
probably sustain a current account surplus through 1987. Given the government's
intentions to strengthen Portugal's credit rating, we expect Lisbon to continue its
efforts to restrain the growth of its foreign debt.
23 Secret
DI IEEW 86-047
21 November 1986
I Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
,I J..
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Criticism of
US Trade
Investigations
West Germany
Proposes East-West
Economic Conference
Secret
21 November 1986
International Trade
Washington's decision last year to initiate unfair trade practice investigations?
Section 301 cases?is prompting increased criticism from trading partners.
Brasilia claims the case against its Informatics Law is an attack on its national
sovereignty and development goals. Seoul was highly indignant about the insur-
ance and intellectual property rights cases because it believed it was making
progress toward liberalization. Both countries maintain that the investigations may
actually have slowed progress toward opening markets by weakening domestic
support for reform. Many LDCs have charged that the government-initiated cases
elevate disputes to a political level and spare countries less dependent on US trade.
Increasing numbers of GATT members say the policy undermines GATT by
supplanting the multilateral process with domestic dispute settlement procedures.
Future 301 cases are likely to cause many GATT members to complain that the
new round commitment to freeze and dismantle protectionist measures precludes
new investigations. Moreover, countries will be especially reluctant to make
concessions on key issues, such as intellectual property rights, that will be
negotiated in the new GATT round.
Status of 301 Cases,
1985-86
Country
Case Status
Japan
Semiconductors Agreement reached
Tobacco Agreement reached
Brazil
Informatics Discussions ongoing
South Korea Insurance Agreement reached
Intellectual property rights Agreement reached
Argentina Soybeans Discussions ongoing
EC EC enlargement
Canada Fish
Interim agreement /discussions ongoing
Agreement reached
Taiwan
Customs valuation Agreement reached
Beer, wine, and cigarettes Retaliation planned/discussions ongoing
Global and Regional Developments
The West German Economics Ministry has endorsed the idea of a conference on
East-West economic cooperation in a study commissioned by the Chancellor's
office,
. The report outlined several possible formats: a
follow-on to the CSCE review meeting in Vienna next spring, a meeting sponsored
by the UN Economic Commission for Europe, or one completely independent.
Potential topics include technology transfer and industrial cooperation. The study
24
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
West German Reaction
to US-Japan Exchange
Rate Agreement
Turkey Reportedly
Weighing EC
Membership Bid
has been endorsed by the Foreign Affairs and Finance Ministries. Kohl may have
seen a German-proposed conference as a way to build his image in international
relations prior to the January 1987 national election. Foreign Minister Genscher
probably planned to call for the conference when he addressed the recent CSCE
conference last week. However, a similar proposal by Soviet Foreign Minister
Shevardnadze left him to merely second Moscow's suggestion. Given the high-level
interest in Bonn, the government is likely to continue pushing for the participation
of key Allies, including the United States.
Bonn's reaction to the recent US-Japanese agreement on exchange rates and
economic policy has been cool and calculated to distance Bonn from any similar
proposals. Bundesbank Vice President Schlesinger emphasized that West German
willingness to coordinate interest and exchange rate policies was limited by the
economy's already excessive liquidity. West Germany is making its contribution to
world economic adjustment, he argued, by permitting the money supply to
overshoot its target. Bundesbank President Poehl and Economics Minister Bange-
mann disparaged the use of purely monetary measures to redress large bilateral
trade imbalances, with Bangemann claiming that attempts to set exchange rate
zones will inevitably fail. Poehl and Finance Minister Stoltenberg placed the US-
Japanese agreement in the context of Japan's particular economic situation. They
argued that Japan's discount rate cut is defensible because growth is slowing in Ja-
pan and because its "excessive" export orientation has resulted in a bilateral
surplus with the United States that is much larger than the West German?US
surplus.
Prime Minister Ozal reportedly is considering applying for Turkish membership in
the EC by 1 December, but a reluctant Community is unlikely to offer more t an
minor concessions or a promise to begin the membership process. 25X1
the Turks may see early application as a way in which the anticipatet EC 25X1
decision to renege on the free circulation of Turkish labor throughout the
Community?because of high unemployment in Europe?might be postponed and
the issue renegotiated.The EC, still adjusting to the addition during the past five
years of Greece, Spain, and Portugal, looks unfavorably on an application by a
large, relatively undeveloped country at this time. Some member states also harbor
lingering doubts about Turkey's record on human rights, political stability, and
non-Christian, non-European orientation. Entry would also be costly to Turkey in
the short term?few of its protected industries are prepared to face full European
competition. EC members would probably allow Greece to take the lead initially in
squelching a Turkish bid?a role Athens has indicated it is willing to play?but
probably will eventually offer minor concessions or promise to begin negotiations
and transitional arrangements leading to membership?taking up to 20 years?to
avoid alienating the Turks. Ankara would resent any response implying permanent
second-class status and would distance itself from EC members in other forums,
such as NATO. If the EC can convince Turkish officials it will seriously consider
eventual membership, Ozal might be willing to wait until the 1988 Turkish
parliamentary campaign to press the issue. 25X1
25X1
25X1
25X1
25 Secret
21 November 1986
, Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
,.!
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
iv France Slowing
Weapons Deliveries
to Iraq
\ Limited US Role
in Eurofighter
Tokyo Vague on
Promises of
Philippine Aid
Saudis Withhold
Oil Payment to Jordan
According to the US Embassy in Baghdad, France is slowing some weapons
deliveries to Iraq because of Baghdad's foreign currency shortage. During a
meeting of the French-Iraqi Joint Economic Committee earlier this month, Iraq
said it would not be able to meet French requests for payment on delivery unless
shipments were stretched out over a longer period. The slowdown is unlikely to
hamper Iraq's war effort. Baghdad has adequate military supplies, and France is
unlikely to severely restrict shipments. Although France has rescheduled Iraqi
civilian debt due this year, Paris is taking a harder line on the nearly $2 billion in
military debt because of Baghdad's failure earlier this year to make several
payments.
The board of directors of the European Fighter Aircraft consortium has estab-
lished bidding regulations that effectively eliminate US companies from participa-
tion except for development of its radar system. According to a US attache in
Bonn, the regulations require all companies on the bidders list to be from
consortium nations. Others may submit proposals only through companies in
consortium nations, and they must agree to full manufacture within those
countries and to full disclosure of any restrictions on technology transfer and
export. According to the attache, knowledgeable West German defense officials
and US businessmen believe the regulations reflect strong British influence. The
new regulations?obviously calculated to avoid US restrictions on technology
transfer?will probably eliminate from competition a US-built engine currently
under consideration. London is likely to continue insisting that the new fighter
remain as European as possible, despite the fact that a partnership of US and
British electronics firms is the prime contender to produce the fighter's radar.
President Aquino's visit to Japan gained her the clear support of a major regional
ally but only one firm commitment for new funding?$250 million for a coal-fired
power plant. In addition, Prime Minister Nakasone promised Aquino a grant of
$150 million and suggested that Tokyo would increase its annual lending
package?$300 million last year?but details are still being negotiated. Manila
probably intended its unrealistically high aid request of $1.6 billion only as a
starting point in the negotiations. Aquino probably accepts Tokyo's funding
package as the best deal possible. She will try to use Nakasone's strong personal
support to offset public doubts about her leadership and threats of military
intervention. Japanese businessmen are not likely to increase their investments in
the Philippines until the political climate improves.
Saudi Arabia's apparent failure to carry out its promise to pay the bill for oil Jor-
dan imported last year has placed Amman in a financial bind. The US Embassy in
Amman says Riyadh has told King Hussein it will not pay Aramco for oil Jordan
imported through the Trans-Arabian Pipeline during the last half of 1985. The
bill?which Amman claims it has regarded as an outright Saudi grant?amounts
to about $195 million, including interest. Riyadh, concerned about its slumping
Secret 26
21 November 1986
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Japan Trying
To Sell Oil Rigs to
Vietnam
Indonesia To Buy
Chinese Coal
economy, may intend to withhold money for new Jordanian programs until oil
revenues recover. If Jordan has to pay the bill, it may abandon a proposal in the
1986 budget?which already faces a projected deficit of more than $500 million?
to spend $30 million on the King's ambitious West Bank development plan. Jordan
also would be forced to draw down its foreign exchange reserves, which had fallen
to about $280 million at the end of August?equivalent to only two months'
imports. King Hussein undoubtedly will go to Riyadh soon to plead for an oil
grant, which the Saudis ultimately are likely to provide.
Two of Japan's largest trading companies?Mitsui and C. Itoh?are competing to
sell oil rigs for use in Vietnam's offshore oil and natural gas exploration project,
. The rigs were originally designed for use on the So- 25X1
viet Union's Sakhalin oil and gas project, which has been indefinitely postponed. 25X1
C. Itoh is offering to purchase oil from the Vietnamese project if Hanoi buys its
rigs, and Mitsui is offering to participate in the project directly by buying out
Moscow's share?a development that Mitsui executives have been interested in for
several months. Both companies are presently negotiating with Hanoi but realize
that Moscow will have a large say in any deal. Despite Vietnam's debt problems,
C. Itoh and Mitsui appear enthusiastic about doing business with Hanoi and
anticipate a profitable future trading with Vietnam 25X1
25X1
Indonesia plans to import 400,000 metric tons of anthracite coal from China for a
power plant currently fueled by Australian coal. Arranging a countertrade with
Beijing has been difficult, however, because-
Jakarta insists that China buy Indonesian cement at a price Beijing
considers too high. Jakarta hopes that China will eventually supply up to 50
percent of its coal imports, nearly all of which now come from Australia. The coal
agreement with China is part of broader efforts by both countries to increase
bilateral trade. Nonetheless, continued ill 25X1
feeling towards Canberra over Australian press articles last spring on corruption in
Indonesia's First Family is also prompting Jakarta to find other suppliers.
25X1
25X1
25X1
1 Cuba Pushing Since the resumption of full diplomatic relations in late June, Cuba has moved en-
Commercial Ties to ergetically to promote economic ties to Brazil. Cuban Foreign Trade Minister
Brazil Cabrisas, who spent much of October in Brazil exploring commercial opportuni-
ties, told the Brazilian press that he expected trade in 1987 to reach $60-100 25X1
27 Secret
21 November 1986
I Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
? , I
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Japanese Semiconductor
Makers Cut Costs
Japanese
Structural Adjustment
Law Proposal
Secret
21 November 1986
million. The Cubans apparently are looking to Brazil as a source of technology,
equipment, and raw materials that are otherwise inaccessible, and as a partner for
joint ventures and other types of economic cooperation. Although some Brazilian
firms are exploring opportunities, Cuba's severe hard currency shortage, its limited
range of exports, and Brasilia's reluctance to offer Havana trade credits, will keep
commercial exchanges low, in our judgment.
Brasilia is unlikely to agree to a $100-200 million trade credit
sought by the Cubans. A Brazilian Foreign Ministry official recently told the US
Embassy that he was under no illusion that credits to Havana would be repaid and
expected the Central Bank to oppose them. However, we believe political advisers
in Brasilia see a modest credit line to the Cubans as a low-cost gesture to the
Brazilian left.
National Developments
Developed Countries
Japanese semiconductor manufacturers now appear determined to hold the price
of memory chips as low as possible, a strategy we expect will discourage all but the
strongest competitors from entering or staying in the worldwide memory market.
major Japanese producers
began discontinuing use of 6- and 8-inch wafers in August in favor of the 4- and 5-
inch wafers they had been planning to phase out.
continued use
of smaller wafers would lower equipment costs and improve efficiency because
distortion and warping has held down Fujitsu's yields from 6-inch wafers. With
lower manufacturing costs, the companies can ask for a reduction in the fair
market value for memory chips exported to the United States under the terms of
the US-Japanese semiconductor agreement signed in September.
use of 4- or 5-inch wafers on existing 256K DRAM assembly
lines would justify prices of $2 to $3 per chip.
Last week MITI approved draft legislation to satisfy Prime Minister Nakasone's
desire to submit a structural adjustment bill to the Diet session beginning in
January, . To meet the deadline, MITI
restricted the focus of the legislation and avoided the politically sensitive issue of
chronically depressed industries, such as shipbuilding and aluminum. But some
aspects of the bill, which must gain Finance and Labor Ministry approval before
going to the Diet, may still prove controversial. For example, measures to ease the
regional and employment effects of the strong yen on industry, although appealing
to Liberal Democratic Party politicians, run counter to the Finance Ministry's
austerity drive. In addition, proposed measures giving MITI greater control over
Japanese industrial structure matters?as yet unspecified?are likely to meet
industry opposition.
28
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Disappointing
French Trade
Balance
I- New Belgian
Labor Leader
k Spanish Inflation
Accelerates
Trade Minister Michel Noir recently conceded that France's foreign trade account
will be in rough balance for 1986. This is a sharp retreat from earlier government
projections of a trade surplus of more than $2.7 billion, following a $2.6 billion
deficit in 1985. The shortfall has come about despite lower energy import prices
that saved France $10 billion compared to last year. French imports have been
boosted by strong internal demand, while France's export markets, particularly
West Germany, have not been growing as expected. Noir stated that he does not
expect any significant trade improvement until the autumn of 1987, but this may
be wishful thinking. Nongovernment projections foresee continued strong import
growth that may swamp any improvement in export sales.
In early November Willy Peirens, a longtime Flemish labor activist, was elected
president of the powerful Catholic Labor Confederation (CSC/ACV) effective
August 1987. The CSC/ACV?which represents 1.3 million workers?has close
ties to the centrist Flemish Social Christian Party (CVP) and current Prime
Minister Wilfried Martens. As president, Peirens will ensure Catholic labor's
continued support of the CVP-led coalition, thus contributing to the stability of a
government frequently shaken by squabbling between Belgium's linguistic commu-
nities. Well disposed toward the United States, he will also be able to help sell con-
troversial US trade and security policies to labor. As a labor moderate, Peirens fa-
vors dialogue rather than confrontation with management. He rose through the
rank and file and, while not given to flambo ant oratory, he has a reputation for
delivering on his commitments.
The 1.1-percent increase in September's consumer price index brings Spain's
annual inflation rate to 9.5 percent, 1.5 percentage points above Madrid's yearend
target. The news has prompted the government to lower the official prices of
petroleum products, and Madrid is now looking at ways to moderate food prices?
which jumped 2.2 percent in September. One option under consideration is to
increase the domestic supply of fruits and vegetables?probably by increasing
imports from North Africa?to relieve the upward price pressure caused by
Spain's rising exports of these goods to the EC. Officials will also probably turn to
the EC for a better marketing arrangement for the allocation of US feedcorn
resulting from the US-EC interim solution to the enlargement dispute. This
agreement has led to imports of higher priced corn to Spain while cheaper corn is
shipped to Northern Europe. We expect inflation to be 8.5 to 9 percent by yearend,
which is certain to make it more difficult for Madrid to achieve its goals of
maintaining wage moderation and reducing the 6-percentage-point inflation
differential with its EC partners.
29 Secret
21 November 1986
1 Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
25X1
25X1
25X1
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Sweden Nervous
About Inflation
Brazil's Dangerous
Monetary Policy
Higher Colombian
Inflation Looming
Secret
21 November 1986
Stockholm's concern about recent increases in inflation forced the government to
reach agreement with farmers last week to postpone food price increases until next
year. The Social Democrats calculated that the scheduled price increases under
Sweden's farm program would fuel inflation, which hit annual rates of 3.6 percent
in August and 4.1 percent in September. If inflation does not recede to 3.2 percent
by year's end, unions will be able to invoke a contractual clause that permits them
to renegotiate their agreements. The nine-month-old Carlsson government would
like to avoid more labor clashes?like the recently ended public-sector pay
disputes?that have strained relations between the Social Democrats and their
union allies. The government is attempting to balance its prounion reputation with
efforts to control inflation and prevent erosion of Sweden's international competi-
tiveness. Sweden must avoid any general price increase during November and
December if inflation is to remain below the 3.2-percent trigger.
Less Developed Countries
We believe that Brazil's easy money policies are cutting short the success of its
Cruzado Plan. Brasilia has slowed expansion of the money supply and the
monetary base since July, but rapid growth early in the year will result in a
300-percent rise in these aggregates in 1986, according to Brasilia's own projec-
tions. The economic authorities contended that a surge in the money supply was
necessary to support anticipated increased savings and investment in the new low-
inflationary environment. As official statistics became available this fall, however,
monetary authorities discovered that the increased cash was not being held in
cruzado assets?real savings remain at their depressed pre-Cruzado-Plan level?
but being spent on durable goods and speculative investments. In addition, there
are indications that increased subsidy payments and a larger-than-anticipated
public deficit are spurring growth of the money aggregates?the same factors that
have traditionally fueled the inflationary spiral. So far, the tightened monetary
policy and resultant higher interest rates have had little effect on consumer
demand and inflationary expectations, according to the US Embassy. Moreover,
with the government's borrowing requirements projected to remain high, Brasilia
probably has little hope of meeting its recent pledge to limit monetary expansion to
20 percent during the last quarter of 1986. Consequently, we believe Brazil faces a
strong resurgence of inflation if price controls are eased next year.
Inflation, fueled by rising domestic food prices and the coffee windfall, is once
again becoming a problem for the Colombian economy. Inflation had slowed in
recent months largely because of lower food prices, caused by increasing illegal
30
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
25X1
25X1
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Paraguay's Stalled
Economic Reforms
Uruguayan Economic
Growth Continues
food imports from Venezuela and Ecuador encouraged by the overvalued exchange
rate. Although the short-lived drop in food prices temporarily offset inflationary
pressures stemming from the sharp rise in money in circulation, it also discouraged
domestic production of staples competing against smuggled powdered milk,
poultry, eggs, and rice and created shortages of other food products. By the end of
October, food prices had rebounded above the level of the past three years.
Inflation could hit a record 30 percent in the first half of next year, and thus pro-
vide a major test for President Barco's economic strategy.
President Stroessner has failed to implement any of the reforms?particularily of
the overvalued exchange regime that encourages black-market activities?under
the stabilization program announced in September. The US Embassy reports that
battles between the finance and economy ministers and Stroessner's perception
that a devaluation is a sign of political weakness have paralyzed economic
policymaking. Moreover, the current economic system provides lucrative opportu-
nities for graft by high-level officials. According to press reports, business and
labor groups?initially enthusiastic about the measures?have begun to denounce
Asuncion's economic ineptitude. Furthermore, anticipation of a devaluation has
virtually halted foreign sales and accelerated imports, adding to an unsustainable
trade deficit. Asuncion's indecisiveness has also led to threats by the Inter-
American Development Bank and the World Bank, to halt disbursements after 1
January 1987. Asuncion will probably acquiesce to a devaluation by year's end?
though less than what is needed?but we doubt that the government will draft co-
herent fiscal, monetary, or investment policies before next summer.
While Uruguay's economic activity remains below peak levels, we expect the
recovery that began late last year to continue through 1987. According to the US
Embassy, external factors such as lower international interest rates, the weaker
US dollar, and the sharp drop in oil prices stimulated most of the projected
3.6-percent economic growth this year. Domestically, higher real wages, increased
domestic demand, and fewer strikes boosted productivity. In addition, the press
reports that Montevideo eased debt service requirements by rescheduling commer-
cial loans and increased exports by negotiating regional trade accords, particularly
with Brazil. Nonetheless, fluctuating exchange rates and depressed agricultural
prices could undercut expanding export sales. Moreover, the US Embassy reports
that the Central Bank is issuing currency to buy up dollars, thereby depreciating
the peso and encouraging exports in the short term. Along with the onerous fiscal
deficit, this could negate Montevideo's other efforts to control inflation over the
coming year.
31
Secret
21 November 1986
1 Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
25X1
25X1
25X1
25X1
4 14 44 41 4 4141
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
L- New Syrian
Tax Measures
Lebanese Pound
Falling Faster
v Japanese Bank
Expects Indonesian
Rescheduling
Thai External
Accounts Improve
Dramatically
Secret
21 November 1986
Damascus is focusing on tax collection to reduce its budget deficit. New programs
are aimed at collecting lost customs duties on smuggled home appliances, and
higher taxes on automobiles and real estate. Owners of the country's estimated
400,000 illegal televisions have been given a grace period to register their sets and
pay the duty. The US Embassy reports a positive response and estimates up to $30
million in revenue gains. A possible new tax on air conditioners could net
Damascus $2 million. The Ministry of Economy and Foreign Trade is expected to
take control of all automobile sales, acting as a broker to ensure payment of taxes
and title fees. Finally, Damascus will collect new taxes based on the appraised
value of commercial real estate, which reflects recent price increases. The new
taxes appear evenly distributed and will probably improve government finances
and may stem the annual inflation of more than 100 percent.
The Lebanese pound fell sharply last week on Beirut's foreign exchange market. It
closed at almost 69 pounds per US dollar, falling 7 percent in one trading day. The
pound has fallen 75 percent this year, after a 60-percent decline last year. Banking
sources of the US Embassy attribute the rapid decline in past weeks to eroding
confidence in the pound among the Lebanese population?there are few significant
economic changes and the security situation is unchanged. Many resident holders
of bank accounts are probably shifting into special dollar-denominated accounts,
which explains the rapid deterioration vis-a-vis the dollar. In addition, speculation
probably rose following the disappearance of a Lebanese wheat dealer who had
$28 million in debts to three major Beirut banks. Although the pound will
probably remain weak, a symbolic political event such as the resumption of cabinet
meetings could reverse the slide.
A leading Japanese bank reportedly expects Jakarta to reschedule its foreign debt
in late 1987. The bank calculates that a possible $3 billion drop in Indonesian ex-
ports this year will seriously impede Indonesia's ability to service its nearly $40 bil-
lion foreign debt. Combined with the collapse of world oil prices earlier this year,
most nonoil commodities exports are also suffering from low prices; and Indonesia
has not had much success in boosting sales of its uncompetitive, high-cost
manufactured goods. Even after factoring in the impact of the recent rupiah
devaluation, the bank estimates that the current account deficit will reach
$4 billion this year and swell to $7.5 billion in 1987. Moreover, because much of
Indonesia's foreign debt is denominated in the appreciating yen, the devaluation
will raise debt service payments to $6 billion annually, an amount equal to 40-per-
cent of projected export earnings.
According to press reports, some Bank of Thailand officials expect a spectacular
improvement in the country's external accounts this year. The Bank projects the
trade deficit to decline by about 80 percent from last year, to $610 million,
because of strong manufactures export growth and lower prices for imported oil.
Further, the Bank calculates that this trade performance will swing the current ac-
count from a $1.6 billion deficit in 1985 to a $75 million surplus, the first in two
32
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
25X1
25X1
25X1
25X1
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
1 Thailand's New Price
Supports for Rice
Increasing Soviet
Gold Sales
'China Exhibits
Military Goods
for Export
decades. Despite the improvement in Thailand's external position, we believe that
real economic growth this year is likely to gain only slightly from a postwar low of
4 percent last year, because most of Thailand's business activity remains depressed
and large budget deficits limit the use of fiscal stimulus to boost consumer
demand.
We believe that the $227 million package to support domestic rice prices recently
announced by Bangkok is likely to fail and seems certain to intensify tensions
within Prime Minister Prem's coalition government. The new package is similar to
other unsuccessful efforts since 1980, when Prem took office.
the primary aim is to increase farmers' incomes by
boosting purchases and prices early in the harvest season. Measures include $192
million for cheap loans to millers, $23 million for government purchases and for
storage, and $12 million for direct export subsidies. We estimate, however, that the
package at best could finance the stockpiling of only 10 to 15 percent of the main
season crop, an amount unlikely to significantly affect producer prices.
Communist
the USSR has sold an estimated
250 metric tons of gold through August of this year, earning Moscow nearly $3
billion. The Soviets are attempting to avoid depressing gold prices by using
techniques that hide the level of their sales. These techniques include frequent
sales and purchases, using all the gold exchanges; direct sales to customers; and
complicated gold swaps. However, large Soviet gold sales during early-to-mid-
October caused the price to fall and prompted Moscow to retreat from the market,
The Soviets are likely to earn an additional $2.5 bil-
lion over last year from higher gold prices and increased sales, which may reach
400 tons?more than double last year's 190-ton mark. These revenues will help
offset their declining oil earnings, which are projected to drop about $4 billion this
year. Moscow is likely to continue heavy selling next year, but it will probably not
be able to market another 400 tons without depressing prices.
China held its first international military equipment exhibition last week in
Beijing. All six of China's defense industrial ministries displayed products, which
ranged from ammunition to reconnaissance equipment and even included models
of satellite launch vehicles, a nuclear submarine, and China's F-8-2 fighter
aircraft. More than a dozen other countries also displayed their wares, but we
believe the show was held primarily to promote Chinese military exports. In fact,
press reports indicate that most of the foreign visitors were from Third World
countries in the market for armaments. China has openly displayed military
equipment at other international exhibits?the Paris and Farnborough Air Shows,
for example?and is looking to military exports as one means of financing its
ambitious modernization program. We estimate that China has earned more than
$1 billion already this year from its growing arms export business.
33
Secret
21 November 1986
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
25X1
25)(1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
I I
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
I I
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
25X1
I., , I
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9
Secret
Secret
Declassified in Part- Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100670001-9